Nested Tests of Alternative Term-Structure Theories

On the Forecasting Content of the Implied Forward Rate

“…First, findings presented here confirm the well-known results of Belongia (1); Conard (5); Cox, Ingersoll, and Ross (6); Friedman (14); Kane (20); Pesando and Plourde (24); Shiller, Campbell, and Schoenholtz (32); Throop (33) and others, that forward short-term interest rates, those forward rates implied by spot market yields, fail to explain future movements in short-term rates.…”

Finance

“…The expectations-forming mechanisms utilized in empirical studies have been varied and inventive. They have included an error-learning mechanism (Meiselman, 1962); distributed lags on past rates (Modigliani and Sutch, 1966) or on inflation (Modigliani and Shiller, 1973;; use of ex post data under an assumption that market efficiency and rationality require that ex post realizations do not differ systematically from ex ante views (Roll, 1970;Fama, 1984a and b); and survey data assumed to reflect the actual expectations of market participants (Kane and Malkiel, 1967;Malkiel and Kane, 1968;Kane, 1983). While affirming the general importance of expectations in influencing the shape of the yield curve, empirical studies have generally rejected the pure form of the expectations hypothesis.…”

Forecasting the Treasury Bill Rate: A Time‐varying Coefficient Approach

“…Much empirical work examines the predictive accuracy of forward rates in the term structure of interest rates (see Fama (1984), Hamburger and Piatt (1975), Kane (1983)). The literature suggests that forward rates are poor predictors of future spot rates.…”

“…Departures of forward rates from the corresponding future spot rates can be attributed to the existence of a premium, the effect of policy innovations, the misspecification of the model, or problems with the ordinary least squares (OLS) estimation procedure. While a significant body of research addresses the first two issues (see Fama (1984), Kane (1983), Mankiw (1986)), little attention is paid to the potential specification errors or biases in the OLS procedure. In this paper a Kalman filter approach is used to examine the stability of the expectations hypothesis for the term structure of interest rates and to test the fitting and forecasting accuracy of a time‐varying expectations model for term structure.…”